As a Muslim investor, it is important to ensure that your investments align with Shariah principles. At Musaffa, we understand that maintaining a Halal portfolio is more than just screening for Shariah compliance; it’s also about taking the necessary steps to purify your investments.
Stock investment purification is a process of identifying, separating, and directing the stock’s non-Sharia-compliant income to charity.
In the context of stock investment, 3 scenarios need income purification, they are:
a. Purifying non-halal income while holding halal stocks
b. Purifying capital gains earned from selling the Halal stocks
c. Purifying the income earned from stock that has changed its status from halal to not halal
1. How to purify your non-halal income while holding halal stocks?
In this first scenario, investors hold a halal stock with an impermissible income of less than 5%. Remember, 5% is the maximum threshold for the non-halal income for the Shariah-compliant stock criteria. Although the stock has halal status, the investor is still obliged to perform purification if it has an impermissible income of less than 5%.
In this case, investors may earn cash income from distributed dividends; they may also earn non-cash income such as bonus shares, warrants, or options to subscribe to preference shares. Therefore, there are two ways to cleanse the income in this scenario:
a. Purifying non-cash benefits
The benefits could be in the form of bonuses, shares, warrants, options, and others. There is no cleansing for such benefits.
The reason is that investors do not receive direct cash from those benefits. Investors will receive the cash income in the next cycle of dividend distribution. Therefore, cleansing will be performed at that time. Nevertheless, if the investors opt to cash out their benefits or sell the warrants and options, they need to clean the income using the same method as cleansing the cash income.
b. Cleansing cash income from dividends
The cleansing is made in proportion to the percentage of the company’s non-Shariah-compliant income.
For example, according to the company’s audited financial report, the Shariah non-compliant income is 2% of the total income; therefore, investors should distribute 2% of the company’s dividend to charity.
This method sounds simple, but it is difficult for investors to know the non-Shariah-compliant income percentage of a particular company. Almost all index providers or Shariah stock screening institutions only provide the halal status of the stocks without disclosing the percentage of the company’s impermissible income.
The Musaffa Halal stock screener platform provides the exact percentage of a company’s halal and non-halal income, which is helpful for Muslim investors. Moreover, Musaffa provides a purification calculator that investors can easily use to calculate their purification amount.
With our new feature called Portfolio Compliance and Purification Tracker, you can integrate your brokerage account or manually input your portfolio on the platform to calculate the purification amount effortlessly.
Musaffa’s Purification Tracker makes investment purification easy for you. It continuously monitors your investments, alerts you to any compliance changes, and provides guidance on purifying your earnings.
2. Purifying capital gain earned from selling the Halal stocks
When investors sell their halal stock at a higher price, they do not need to cleanse their cash income. This is based on the argument that the change in the stock price does not directly reflect the company’s impermissible income or interest-based activity.
In fact, market fluctuations in stock prices are a complex phenomenon that relies on various factors, including supply and demand. As a result, the capital gain is not a direct source of non-shariah-compliant income and activities.
3. Purifying the income earned from stock that has changed its status from halal to not halal
Muslim investors should not hold any stocks that have changed their status from halal to not halal. To put it another way, investors should get rid of it by selling it. This requirement aims to prevent Muslim investors from contributing to non-shariah-compliant businesses.
There are two conditions that investors might face in this scenario;
a. The stock price is higher than the initial price
When the halal stock turns into not halal, and the price is higher than the initial price (investor’s capital), investors should dispose of it. If investors sell the stock immediately on the announcement date, they can keep the capital gain, but if they sell it after the announcement date, they can keep the principal and channel the profit to the charity.
For example:
- An investor purchased halal stock on May 1, 2022, at $1.00 per share. Then, on May 1, 2024, the stock price went up to $5.00 per share. The stock was declared as non-shariah-compliant stock (not halal) on the same date. If the investor sells it immediately, he can keep capital gain by selling the $5.00 worth of stock.
- Let’s assume the next day, May 2, 2024- the stock price increased to $5.50 per share, and the investor decided to sell the stock on this day. Under this scenario, the principal is equal to the price on the announcement date. This is because the price is considered the price of the stock when it has halal status, and any increase in the value is considered Shariah-compliant. Therefore, the investor is entitled to keep $5.00 (as the principal) and channel the $0.50 to the charity.
b. The stock price is lower than the initial price
In another scenario, let’s assume that on the announcement date ( May 1, 2024), the stock price fell below the buying price at $0.85 per share. The investor’s buying price is $1.00 per share (principal). If he sells his stock on the same announcement date, he will lose $0.15 per share of his principal.
As advised by our Shariah advisors, Mufti Faraz Adam and Shaikh Dr. Aznan Hasan, the investor has a grace period of 90 days to wait until the non-compliant status changes to compliant.
During this grace period, the investor can continue to hold their shares. After 90 days, if the stock remains non-compliant, they are required to sell their shares. Investors should use this grace period to manage their losses.
Now, you can seamlessly integrate your portfolio into your Musaffa account. With Musaffa’s Portfolio Compliance & Purification Tracker, you can invest with peace of mind, knowing that your investments align with Shariah principles. Our tracker continuously monitors your portfolio, alerts you to any compliance changes, and offers clear guidance on purifying your earnings.
Disclaimer: Important information.
